Wolder v. Commissioner
493 F.2d 608 (1974)
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Rule of Law:
Property acquired by an individual from a decedent's estate under the terms of a will constitutes taxable income under § 61 of the Internal Revenue Code, not a tax-exempt bequest under § 102, if it is transferred as compensation for services rendered pursuant to a contract.
Facts:
- On October 3, 1947, attorney Victor R. Wolder and his client, Marguerite K. Boyce, entered into a written agreement.
- Under the agreement, Wolder promised to provide Boyce with any legal services she required for the rest of her life without billing her.
- In exchange, Boyce promised to bequeath specific corporate stock (or its equivalent) to Wolder in her last will and testament.
- Wolder provided legal services to Boyce throughout her lifetime in accordance with the agreement.
- Boyce died on July 24, 1965, and her will, true to the agreement, bequeathed 750 shares of Schering Corp. stock and $15,845 in cash to Wolder.
- Wolder was also named a co-executor of Boyce's estate along with Manufacturers Hanover Trust Co., which held the stock in a custodial account.
Procedural Posture:
- The Commissioner of Internal Revenue determined a deficiency in Victor and Marjorie Wolder's income tax, classifying the property received from Boyce's will as taxable income.
- The Wolders challenged the deficiency in the U.S. Tax Court.
- The Tax Court held that the value of the stock and cash was taxable income under § 61, not an exempt bequest.
- The Tax Court also ruled that the income was constructively received in 1965, the year of Boyce's death.
- The Wolders, as the individual taxpayers, appealed the Tax Court's decision on the taxability of the income to the U.S. Court of Appeals for the Second Circuit.
- The Commissioner filed a cross-appeal, challenging the Tax Court's ruling on the timing and arguing the income was actually received in 1966.
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Issue:
Does property transferred to an attorney through a client's will, pursuant to a contract for lifetime legal services, constitute a tax-exempt bequest under § 102 of the Internal Revenue Code, or is it taxable income as compensation for services under § 61?
Opinions:
Majority - Oakes, J.
No, the property is taxable income. A transfer made in the form of a bequest is subject to income tax if it is intended as compensation for services. The court distinguished this case from United States v. Merriam, where bequests to executors were held to be exempt. Here, a specific contract existed where Wolder agreed to perform services in exchange for the bequest. Applying the 'dominant reason' test from Commissioner v. Duberstein, the court found the transfer was not a gift motivated by 'detached and disinterested generosity' but was instead the satisfaction of a contractual obligation for services rendered. The label of 'bequest' under New York state law does not control the characterization of the property for federal income tax purposes, which views the substance of the transaction over its form. The court also held that Wolder did not constructively receive the property in 1965, the year of Boyce's death, because his control was subject to 'substantial limitations,' including the need for his co-executor's consent and potential objections from other legatees. Therefore, the income was taxable in 1966, the year of actual receipt.
Analysis:
This decision significantly clarifies the boundary between a tax-exempt bequest and taxable compensation, emphasizing that substance prevails over form. It establishes that when a transfer via will is made to satisfy a pre-existing contractual obligation for services, it will be treated as income, narrowing the scope of the § 102 bequest exclusion. The case serves as a key precedent for situations where inheritances are tied to services, reinforcing the broad definition of gross income under § 61. For future cases, this ruling requires courts to scrutinize the underlying intent and relationship between the parties to determine the true nature of a testamentary transfer.
